Econ' Fundamentals

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Unit 1

• Econ. Fundamentals

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Chapter 1

• What is Economics?

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Section 1
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Fundamental Problem

• Scarcity not having enough resources to produce
  all things people would like
• Economics study of how people try to satisfy
  wants by use of scarce resources
• Define need and want
• Is anything for free? why?

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3 Basic ?s

• What to produce?
• How to produce?
• For Whom to produce?

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Factors of Production

• Resources required to produce the things we would
  like to have
• This is why we cannot satisfy all wants and needs
  is because these are scarce
• Land natural resources
• Labor people
• Capital tools, equipment etc. used in
  production of goods and services
• Financial capital money
• Entrepreneurs

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• All factors must be present for production to
  take place

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Section 2

• Basic Concepts

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Econ Products

• Goods and services that are useful, scarce and
  transferable to others
• 1. Goods useful or satisfies an economic want
• Consumer goods final use by you
• Capital goods used to produce other goods
• Durable good last more than 3 years
• 2. Services work performed for someone

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Value

• Worth expressed in dollars and cents
• Paradox of value
• Items need to be scarce and have utility to have
  value

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Wealth

• Accumulation of items that are tangible, scarce,
  useful
• Services are not part of wealth intangible

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Circular Flow of Economic Activity

• Market location that allows the exchange of
  products
• Where are markets today?
• Page 15

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Economic Growth and Productivity

• E.G. When nations total output of goods and
  services increases overtime
• Prod. measure of output produced by a given
  amount of inputs over time

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Division of Labor and Specialization

• Division of Labor work is arranged so
  individual workers do fewer task
• Specialization When factors of production
  perform tasks that they can do more efficiently
  than others
• Henry Ford and assembly line

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Human Capital

• Sum of the skills, abilities, health, and
  motivation of people
• Individuals, Businesses and Government invest in
  this.how?
• Figure 1.4

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Interdependence

• America relies on other and visa versa to provide
  goods and services that we consume

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ADAM SMITH p. 18

• Wealth of Nations
• invisible hand
• Little government intervention

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Section 3

• Choices and Decision Making

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• Identify problem and analyze alternatives
• Consider cost and benefits

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Trade Offs

• Alternate choices

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Opportunity Cost

• The cost of the next best alternative use of
  money, time, or resources when one choice is made
  rather than another
• Ex. 10,000 for a car the O.C. is the value of
  other items you could have spent with the money
  paid for the car
• Time is an opportunity cost

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Production Possibilities Frontier

• Represents combinations of goods and services an
  economy can produce when all productive resources
  are fully used
• Guns vs. Butter example
• Figure 1.6 page 23
• Read pages 21-23

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How Economists make choices

• Build simple models
• Simplified theory or simplified picture of what
  something is like or how it works
• Used to better understand past or present and
  predict the future

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• Cost-benefit analysis
• Comparing the costs of an action to the benefits
  received
• Take small incremental steps

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Free Enterprise

• Economy in which consumers and privately owned
  businesses, rather than the government make the
  majority of the WHAT, HOW, and FOR WHOM decisions

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Standard of Living

• Quality of life based on the possession of the
  necessities and luxuries that make life easier

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Politics

• Economics are usually a hot topic in political
  campaigns
• Many of you will vote about this in the future

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Chapter 2

• Economic Systems

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Section 1

• Econ Systems

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• All societies have an economy an organized way
  of providing for the wants and needs of people
• Three types
• Traditional
• Command
• Market

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Traditional

• Habits and customs dictate how resources are used
  and social behavior
• Roles are defined by customs of elders and
  ancestors

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Advantages

• Everyone knows role
• Always know What to produce
• Always know How to produce
• For Whom is determined by customs

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Disadvantage

• Discourage of new ideas
• Lack of progress
• Low standard of living

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Command

• Central authority (government) make most
  decisions
• People have little influence
• North Korea, Cuba

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Advantages

• Change direction in short time
• Little uncertainty

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Disadvantage

• Does not meet wants of consumers
• People sacrifice for good of state
• No incentive to work hard (just to fill quotas,
  same pay for diff. abilities)
• Slow to make decisions (must go through many
  people)
• No flexibility to deal with minor day to day
  problems
• Little rewards for individual initiative

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Market

• People and firms make most decisions
• U.S., Canada, Japan, Germany

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Advantages

• Can adjust to change
• High degree of individual freedom
• Small amount of gov. intervention
• Everyone has a voice how economy runs
• Variety of goods and services
• High consumer satisfaction
• Chart page 38

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Disadvantage

• Basic needs are not provided for everyone
• People too sick, old, etc.
• Not enough services are provided
• Uncertainty as a result of competition and change
• Chance of market failure (if 3 things not met)
• Markets must be reasonably competitive
• Resources must be reasonably fee to move from one
  activity to another
• Consumers need adequate info to make choices
• Must rely on government at times

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Evaluating Economic Performance

• Section 2

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Economic and Social Goals (7)

• Economic Freedom
• Make own decisions
• Economic Efficiency
• Use resources wisely make and good decisions
• Economic Equity
• Fairness (pay, buying goods, advertising)

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• Economic Security
• Social Security
• Full Employment
• Provide as many jobs as possible
• Price Stability
• Inflation rise in general prices
• Fixed income income that does not increase but
  prices do

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• Economic Growth
• Needed to have more goods and services and meet
  needs

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Future Goals

• Americans decide what is important
• Environment, preservation of animals, etc.

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Trade Offs Among Goals

• Effects of new shopping centers, increase in
  minimum wage
• Compare cost against benefits

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Capitalism and Econ. Freedom

• Section 3

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• Market economy is based on capitalism private
  citizens own the factors of production
• Free enterprise also how to describe U.S. econ.
• Competition is allowed with little government
  interference

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5 Characteristics of Free Enterprise

• Econ. Freedom
• Voluntary Exchange act of buyers and sellers
  freely and willingly exchanging in market
  transactions
• Both buyer and seller are better off after deal

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• Private Property Rights
• Own and control possessions
• Do not interfere with others rights
• Profit Motive
• Driving force that encourages to improve material
  well being
• Competition
• Attract consumers while lowering cost

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Role of Entrepreneur

• Decisions cause greater competition, more
  production, higher quality and lower prices

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Role of Consumer

• Determine what is produced how?
• Consumer sovereignty ruler of the market

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Role of Government

• Protector
• Enforces laws. What items?
• Provider and Consumer
• Supply defense services, education, welfare,
  parks, libraries, bus services
• They consumer factors of production (2nd most
  consuming unit behind the consumer)

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• Regulator
• Preserving competition, oversees interstate
  commerce, interest rates, auto registration,
  building and zoning permits
• Most controversial
• Promoter of National Goals
• Reflects will of majority
• U.S. has a mixed economy or modified private
  enterprise

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Business Organization

• Chapter 3

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Forms

• Section 1

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Three Main Forms

• Sole-Proprietorships
• Partnerships
• Corporation

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Sole Proprietorship

• Most common
• Ran by one person

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Adv.

• Easy to start (license and fees)
• Easy to manage
• Does not share profits
• Does not have to pay separate business income
  taxes (still pay individual income tax)
• Be your own boss
• Easy to get out (pay outstanding bills)

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DisAdv.

• Unlimited Liability fully responsible for all
  losses and debts
• Need money
• Hard to hire people or keep inventory
• Person has limited owner manager experience
• Limited life

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Partnership

• Owned by two or more
• Least used org.

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Adv.

• Easy to form
• Easy to manage
• Lack of special taxes
• Attract more financial capital than sole prop.
• Larger more efficient

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DisAdv.

• Responsible for the acts of all others
• Limited Life
• Conflict of partners
• Bankruptcy permission by a court to cease or
  delay debt payment

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Corporation

• Must file incorporation with nat. gov.
• Charter document that gives permission to
  create
• Sells Stock ownership certificates
• Stockholders
• Dividends check representing a portion of the
  earnings to each stockholder if corporation is
  profitable

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Structure

• Common Stock basic ownership, can vote for
  board of directors
• Preferred nonvoting ownership, but received
  dividends

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Adv.

• Easy to raise capital
• Can borrow by issuing bonds
• Principal and interest
• Directors can hire prof. managers
• Limited liability
• Unlimited life exist even if there is a change
• Easy to transfer ownership

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Disadv.

• Hard to get a charter
• Shareholders have little say
• Double Taxation (corp. and indiv.)
• More gov. regulation

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Business Regulation

• States set insurance rates, licensing exams,
  protect consumer interest
• Regulation has been limited to encourage
  competition

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Growth of Business

• Section 2

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Two ways

• 1. Reinvest profits
• 2. Merger combine two or more businesses into
  a single firm

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Reinvestment

• Use revenue to invest in factories, machines,
  tech.

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Mergers

• To grow faster
• More efficient
• Get better products
• Eliminate rivals

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Types of Mergers

• Horizontal two or more firms that make the same
  product
• Vertical firms involved in different steps of
  marketing come together

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Conglomerates

• Firm that has at least 4 businesses, each making
  unrelated products, none of which is responsible
  for a majority of its sales

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Multinationals

• Corp. that has operations in a number of diff.
  countries
• Can move goods, services, finances across nat.
  borders

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Other Org.

• Nonprofit organizations seeks to promote
  interest of members, not financial gain

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Community/Civic

• Schools, churches, hospitals
• Do not pay taxes, sell stock
• Hard to measure the value of their products

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Cooperatives

• Co-op
• Vol. association to carry on econ. activity that
  benefits members
• Three Classes consumer, service, producer

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Consumer

• Buys bulk goods like food and clothing

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Service

• Provides services like insurance, credit
• Ex. Credit Union

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Producer

• Helps members promote or sell their products
• Farmers

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Labor, Professional and Business Org.

• Labor Unions represent members interest
• Collective bargaining
• Professional Associations people in a
  specialized occupation that works to improve
  their profession
• Amer. Bar Association

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• Business Association
• BBB

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Government

• Has a Direct Role to consumers
• Government supplies goods and service that
  competes with private businesses
• TVA, FDIC, USPS
• State provides police, fire, schools, etc.
• Indirect Role
• Acts as umpire to make sure market operates
  smoothly
• Public utilities, cable tv, Soc. Security,
  financial aid, unemployment